What is Carrying Value of Bond?

The carrying value is the net amount between the face value of the bond and any unamortized premiums or reduction of any unamortized discounts. The net amount is considered since it’s recorded on the Balance Sheet. The carrying value is also referred to as Carrying amount or book amount of the bond.

It’s known that bond prices are volatile since they fluctuate daily. As the price is not constant, it causes the bond to be traded at a premium or discount according to the difference between the market rate of interest and stated bond interest on the date of issuance. These premiums or discounts are amortized over the life of the bond, thereby making the value of bond equal to the face value on maturity.

How to Calculate the Carrying Value of Bond?

The effective interest method is one of the most common ways for amortizing premiums and discounts and perhaps one of the easiest methods for computation of carrying value.

For simplicity, let’s assume a firm issues 3 year bond with a face value of $100,000 has an annual coupon rate of 8%. The investors view the firm as with considerable risk and are willing to purchase the bond only if it offers a higher yield of 10%.

Whenever there is an issuance of a bond, a premium or discount account is created which consists of the difference between the face value of the bond and the cash collected through the sale of the bond. While recording them in the financial statements, the bond premium or discount is netted with bonds payable for computing the carrying value of the bond.

The carrying value/book value of a bond is the actual amount of money an issuer owes the bondholder at a given point of time. This is the par value of the bond less any remaining discounts or including any remaining premiums.

Recording Carrying Value of Bond on Financial Statements

The carrying value or book value of bonds payable includes the following amounts all of which are found in bond-related liability accounts:

The face value of the bonds is a credit balance in the account Bonds payable

The related unamortized discount is a debit balance in the contra-liability account as ‘Discount on Bonds Payable’

The related unamortized premium is a credit balance in the adjunct liability account as ‘Premium on Bonds Payable’

The unamortized bond costs associated is a debit balance in the contra-liability account

One should note that the discount, premium, and issue costs are amortized properly up to the moment when the book value of the bonds is needed.

The carrying value of bonds upon maturity will be equivalent to the par value (amount on which issuer pays interest and is required to be repaid at the end of the term. For bonds sold at a discount, the carrying value will increase and equal their par value on maturity.

Certain structure bonds can have a redemption amount different from the face value and can also be linked to the performance of assets such as FOREX, commodity index etc. This may result in the investor receiving more or less than its original value on maturity.

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